by Wendy Lanton

Teaching investors the role their financial representatives play is a crucial component of the educational process.

The recent barrage of articles regarding the “fiduciary standard” is not bound to cease but rather to endure. At the crux of the debate is the Department of Labor’s [DOL] intention to adopt and enforce a new standard that would, among other things, force brokers who work with retirement accounts to become fiduciaries. 

Who, in the industry, will be affected by this? Fundamentally, any financial representative who gets compensated to provide a client with advice on how to invest funds in their 401(k) or Individual Retirement Account (IRA) would be considered a fiduciary and therefore have to put the client’s best interest first.  Presently, brokers—those acting on behalf of a broker-dealer—are subject only to a suitability standard and are not required to act in their client’s best interests.

Most financial professionals, whether affiliated with a broker-dealer or a Registered Investment Advisor [RIA], would agree on two key issues: a) that the securities they select and recommend are both suitable and in the client’s best interests; and b) that investors should and actually do receive the highest level of professionalism and service from their advisors and the firms they represent. 

If all this is true, why are many industry professionals up in arms over the DOL proposal?  From a broker- dealer perspective it likely comes down to how the financial representative is compensated. Under the current draft of the proposal, the “best interests” portion may eliminate the ability for financial professionals to offer certain products, which earn the representative higher commissions.  There are many commission-based products very suitable for retirement accounts. However, preventing advisors from recommending those products would be a disservice to the investing public. This is especially true for smaller accounts. 

Financial professionals who act as fiduciaries are RIA representatives.  They are not compensated “per transaction” but usually are paid a percentage of the assets in the investment account.  This type of structure is simply not suitable for all investors, as many seek to make individual investments and do not desire to have their portfolios managed on an ongoing basis. Consequently, it would be more cost-effective for them to compensate their advisors “per transaction” than with an ongoing fee.

Even if the commission-based structure survives in individual retirement accounts, commissions charged for such products will come under scrutiny.  A broker’s ability to charge a commission is fundamental to the broker-dealer industry.  Different firms offer different levels of service and therefore there is a wide range of commissions charged. An investor with an IRA account has the ability to get the same product from different firms; however, the fees charged by those firms can differ dramatically. Does this mean that the firm charging a higher commission is not acting in the client’s best interest?   

The solution to ensure that the advice received by clients seeking to invest their 401(k) and/or IRA is good and in their best interests may be a rather simple one: education. Teaching investors the role their financial representatives play is a crucial component of the educational process.  The latter should include clear and concise definitions and examples of what actually means for an advisor to be a fiduciary, act in the client’s “best interests” versus being just required to make “suitable” recommendations, and how she gets compensated.  Education would empower investors to make better decisions as to whether working with a financial professional acting as a fiduciary, or resolving that the fee structure is not appropriate for them.

Investors have many choices when it comes to how to invest their retirement monies.  Here are some of their current options:

  1. Full Service Broker-Dealer
  2. Discount Brokerage
  3. Investment Advisory
  4. Robo-Advisor

Furthermore, when an investor chooses to invest with one of the above referenced entities they are faced with understanding the capacities in which their representative is acting.  A financial professional may have any number of titles, including: Financial Consultant, Investment Representative, Financial Advisor, Investment Advisor, Investment Consultant, Wealth Manager and Registered Representative. 

It is not difficult to see that an investor can be easily confused by the choices of firms they can invest with and in what capacity their financial professional is acting.  The solution may be not to force the entire industry to act as fiduciaries. Instead, educate consumers to understand the multitude of choices available to them and how to implement suitable investment decisions. 

The financial services industry should continue to offer a multitude of choices based upon the needs of the investor. While some investors will be better served by commissionable products, for others paying a flat fee or a fee based upon the assets under management may represent the most viable solution.  Either way, the ultimate decision should and does lie with the investor.  A clear disclosure of the fees they are paying and the role their financial professional is playing provides the investor with the option of choosing other investment vehicles, or going to a different financial services provider.  Eliminating choices is unfair.  Education is fair.

Wendy Lanton is Chief Compliance Officer at Melville, NY-based Lantern Investments

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